I wrote here last week about the Second Circuit's opinion in United States v. Kaiser, which overturned a long line of Second Circuit precedent establishing that willfulness in the context of criminal Exchange Act prosecutions requires the government to prove a defendant's awareness of the general unlawfulness of his/her conduct under the securities laws. I pledged to post again and focus a little more on the specifics of the opinion.

The Kaiser Court states that "[m]ore recently, we seemed to endorse a higher standard for willfulness in insider trading cases." This is misleading on several counts.

First, the higher standard for willfulness in criminal cases brought under the Exchange Act was established 40 years ago in United States v. Peltz, 433 F.2d 48 (2nd Cir. 1970). Since when is an opinion from 40 years ago considered recent? Peltz is older that any of the opinions cited by the Court in support of the lower standard of proof.

Second, not one of the higher standard cases cited by the Court explicitly confines the higher standard of proof to insider trading cases. Indeed, Peltz itself was not an insider trading case.

The Kaiser Court states that "Unlike securities fraud, insider trading does not necessarily involve deception, and it is easy to imagine an insider trader who receives a tip and is unaware that his conduct was illegal and therefore wrongful." (emphasis added).

First, insider trading is quintessentially a species of securities fraud. Most insider trading cases are brought under Section 10(b) of the Exchange Act and SEC Rule 10b-5. These are securities fraud provisions by definition and Rule 10b-5 is well known as the classic catch-all securities fraud regulation. As the Supreme Court stated in Chiarella v. United States, "Section 10(b) is aptly described as a catch-all provision, but what it catches must be fraud." 445 U.S.222, 234-35 (1980).

Second, the essence of insider trading is fraudulentdeception through failure to disclose. What Section 10(b) of the Exchange Act outlaws on its face is a "manipulative or deceptive device or contrivance." The Supreme Court in designating insider trading a "manipulative device" has stated that inside traders "deal in deception." See United States v. O'Hagan, 521 U.S. 642, 653 (1997). In fact, all insider trading prohibited by the criminal law involves deception of some party or parties by the inside trader.

The Kaiser Court also at numerous points conflates, deliberately or negligently, case law discussing Exchange Act Section 32(a)'s willfulness requirement with case law discussing Section 32(a)'s provision that "no person shall be subject to imprisonment under this section for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation." As noted in my prior post, the Second Circuit precedent does not hold that the government must establish the defendant's knowledge of the particular rule, regulation, or statute that he/she has allegedly violated in order to prove willfulness under Section 32(a) the Exchange Act. But the government must prove the defendant's knowledge that his/her conduct was illegal in general or "wrongful under the securities laws."

As a general proposition in the Second Circuit, one panel cannot overturn another panel's recent precedent. Here, the Kaiser panel appears to have overturned recent and longstanding precedent of myriad other panels. Maybe the higher willfulness standard under Section 32(a) should go. Clearly, the case law on this issue has not always been clear or entirely consistent. But the bench and bar deserved better here.

This program will examine the Supreme Court’s much anticipated ruling on the federal “honest services fraud” statute, 18 U.S.C. § 1346, and the ramifications it will have on public corruption prosecution and defense. This highly experienced panel will evaluate the new state of the law and explore the ruling’s impact on pending cases.

DOJ issued a press release, dated May 25, 2010, that provides additional guidance on the use of monitors in deferred and non-prosecution agreements. Where the Morford Memorandum had outlined nine basic principles for drafting monitor-related provisions in agreements, this new release provides an additional consideration. The memo provides that "[a]n agreement should explain what role the Department could play in resolving disputes that may arise between the monitor and the corporation, given the facts and circumstances of the case." Interestingly, the memo starts by stating that "the role that the Department plays in resolving particular types of disputes should be consistent with the fact that the Department is not a party to the contract between the company and the monitor." The DOJ policy provides examples of language that might be included in an agreement.

The tension between whether corporate counsel is representing an individual employee or the corporation has proved problematic in several cases. The issue can arise when there is a claim of attorney-client privilege. In United States v. Graf, the Ninth Circuit Court of Appeals considered this issue as corporate counsel was "called to testify in opposition to the [the employee] during a criminal trial against the corporation's former officers." The court stated that:

"Graf was indicted for his involvement in the fraudulent operation of Employers Mutual. The district court held an evidentiary hearing on Graf’s motion in limine to exclude the attorneys’ testimony and, after evaluating the briefing, written declarations, and oral testimony presented, issued an order allowing several attorneys who had represented Employers Mutual to testify against Graf at his criminal trial. The court found as fact that the attorneys represented only Employers Mutual and that Graf had no individual attorney-client relationship to establish a privilege that would be violated by the proffered testimony."

Graf argued on appeal that he was "an independent consultant to Employers Mutual." The Ninth Circuit applied the Bevill test and held that Graf did not hold a "personal attorney-client privilege with respect to his communications with the subject attorneys."

In a post-Skilling entry, the question is raised on this blog as to whether "[i]n adopting a position expressed by a law professor in an amicus brief, is the Court saying that law professors should focus on writing amici briefs and not law review articles?" (see here) Tony Mauro, in a Brief of The Week: Weyrauch v. U.S., National Law Journal, discusses why Professor Albert Alschuler chose to write an amicus brief in Weyrauch v. United States, as opposed to expressing his position in a law review article.

But the question raised on this blog continues to be one of importance for several reasons: 1) law review articles traditionally involve an exposition of legal theory that captures all facets of an argument; 2) law review articles may advocate for a particular position, but most often this occurs after a consideration of arguments in opposition to the position being taken; 3) some law professors disregard 1 and 2 above and believe that law review articles are best when pieces of advocacy; 4) amicus briefs are written to advocate a particular position,even when it is being written by a neutral party.

Clearly Professor Alschuler's brief assists in changing the legal landscape - a criteria often used in reviewing a legal work for purposes of tenure. So, should amicus briefs be more accepted in the tenure process?

A press release of the DOJ advises that "Snamprogetti Netherlands B.V., (Snamprogetti) has agreed to pay a $240 million criminal penalty to resolve charges related to the Foreign Corrupt Practices Act (FCPA) for its participation in a decade-long scheme to bribe Nigerian government officials to obtain engineering, procurement and construction (EPC) contracts..." The company entered into a deferred prosecution agreement in the Sothern District of Texas. The press release states that:

Under the terms of the deferred prosecution agreement, the department agreed to defer prosecution of Snamprogetti for two years. Snamprogetti, its current parent company, Saipem S.p.A., and its former parent company, ENI S.p.A. (ENI), agreed to ensure that their compliance programs satisfied certain standards and to cooperate with the department in ongoing investigations. If Snamprogetti and its current and former parent companies abide by the terms of the deferred prosecution agreement, the department will dismiss the criminal information when the term of the agreement expires.

In a highly unusual move, DOJ issued a letter vindicating an individual who had suffered as a result of a side agreement that had been entered with a 2007 Deferred Prosecution Agreement with American Express. Sergio Masvidal, former American Express Bank International Chair filed a suit charging that his constitutional rights had been violated when the court approved a settlement without knowledge that DOJ had a separate agreement to not employ Masvidal upon a sale of the bank or at the end of the one-year deferred prosecution agreement. He claimed that the result was a loss of "his job, reputation and prospects in the banking industry." DOJ filed a Motion to Dismiss this action, but Hon. William P. Dimitrouleas of the S.D. of Florida issued an opinion denying the government's motion finding "that the DOJ has not shown its entitlement to dismissal of the due process claim on the ground of privilege." (see 2010 WL 1956734)

The DOJ has now issued a letter acknowledging that it had "entered into a separate letter agreement, which prohibited Mr. Masvidal from being employed by any entity that purchased AEBI, or from continued employment with AEBI if no purchaser were found, unless the Department of Justice consented in advance to such employment." Additionally, they acknowledged that this agreement "was not presented to the District Court that was considering the DPA." The clearing letter being issued now tells that its investigation "did not reveal any evidence that Mr. Masvidal had committed any criminal offenses or violated any banking regulations" and that it was terminating the letter agreement's restrictions. Masvidal was represented by Attorney Joseph DeMaria.

Commentary - It is good to see DOJ issuing this letter, but this is another indication of why terms within DPAs need to be disclosed, and why courts need to monitor the agreements. More importantly, government interference with third party contract and employment rights needs to be prohibited. Finally, seeing DOJ move to dismiss this complaint on January 11, 2010 is troubling in light of their recent admission that "[s]uch undisclosed letter agreements are not part of the Criminal Division's practice."

A DOJ press release, tells that "[a] Taiwan thin-film transistor-liquid crystal display (TFT-LCD) panel producer and seller has agreed to plead guilty and to pay a $30 million criminal fine for its role in a global conspiracy to fix the prices of TFT-LCD panels. . ." The press release states:

"According to a one-count felony charge filed today in U.S. District Court in San Francisco, HannStar Display Corporation, based in Taipei, Taiwan, participated in a conspiracy from Sept. 14, 2001, to Jan. 31, 2006, to fix the prices of TFT-LCD panels sold worldwide. According to the plea agreement, which is subject to court approval, HannStar has agreed to cooperate with the department’s ongoing TFT-LCD investigation."

DOJ notes that this investigation so far has resulted in 17 executives being charged and "seven companies have pleaded guilty or have agreed to plead guilty and have been sentenced to pay or have agreed to pay criminal fines totaling more than $890 million."

Former U.S. FoodService ("USF") purchasing and marketing chief Mark Kaiser's convictions on charges of conspiracy and securities fraud were reversed on Thursday, and the case was remanded for a new trial. The Second Circuit's opinion is here. The reversal was based on Judge Griesa's faulty charge on conscious avoidance which was held to constitute plain error. Judge Griesa's conscious avoidance jury instruction did not contain two elements that the Second Circuit has repeatedly stated are necessary: "that knowledge of the existence of a particular fact is established (1) if a person is aware of a high probability of its existence, (2) unless he actually believes that it does not exist." When Judge Griesa suggested sua sponte that a conscious avoidance charge was appropriate, the government reminded him that the two elements must be included, but they did not make their way into the final instruction. Although the defense did not object to the conscious avoidance charge in its final form, the law is so settled on this point that the Second Circuit had little difficulty finding plain error. Failure to include these two limiting elements in a conscious avoidance charge is a longstanding pet peeve of the Second Circuit.

Kaiser also complained that Judge Griesa's instruction on willfulness did not inform the jury that willfulness required knowledge of illegality. Under 15 U.S.C. Section 78ff(a), a/k/a Section 32(a) of the Exchange Act, "[a]ny person who willfully violates any provision of this chapter...or any rule or regulation thereunder the violation of which is made unlawful or the observance of which is required under the terms of this chapter, or any person who willfully and knowingly makes, or causes to be made, any statement in any application, report, or document required to be filed under this chapter or any rule or regulation thereunder...which statement was false or misleading with respect to any material fact, shall upon conviction be fined not more than $5,000,000, or imprisoned not more than 20 years, or both."

A long line of Second Circuit precedent, going back at least to United States v. Dixon and reconfirmed in United States v. Cassese, has established that willfulness in the context of criminal Exchange Act prosecutions requires the government to prove a defendant's awareness of the general unlawfulness of his conduct under the securities laws. To paraphrase Senator McCarthy, virtually every schoolboy knows this, and the standard jury instruction to this effect is included in Judge Sand's widely used treatise, Modern Federal Jury Instructions-Criminal. The government does not have to prove the defendant's knowledge of the particular Exchange Act provision or SEC regulation or rule that he is charged with violating. (This would be inconsistent with Section 32(a)'s language that "no person shall be subject to imprisonment under this section for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation." If a defendant can be convicted, although not imprisoned, under Section 32(a), even if he had no knowledge of the specific SEC rule he was violating, it stands to reason that the willfulness required to convict under the statute does not encompass knowledge of these same specific rules and regulations.)

The standard Second Circuit Exchange Act criminal willfulness instruction sets a high scienter requirement for the government and can literally make the difference between a verdict of guilty or not guilty. The Kaiser Court examined Judge Griesa's willfulness instruction under plain error analysis. Although both the government and the defense submitted the standard Second Circuit charge requiring the government to prove Kaiser's knowledge that his conduct was illegal, Judge Griesa "did not give the proposed instructions, and did not rule on the proposed instructions before giving the charge, calling the practice 'a waste of time.'" In other words, Judge Griesa appeared to disregard the clear mandate of Federal Rule of Criminal Procedure 30(b). But neither party objected to the final charge, thereby bringing plain error review into play.

It is hard to read the Court's opinion on the willfulness issue as anything other than a fundamental misinterpretation of Second Circuit precedent in this area, complete with importation of contrary precedent from other circuits. (I will have more to say on the specifics of the opinion in a future post.) The really unfortunate thing about this decision is that it is unlikely to be taken up and reconsidered en banc. Why? The defendant already has his new trial. The government now has a ruling that significantly lessens its burden of proof in future criminal Exchange Act prosecutions.